Ask Nick

Sample 2020

From the December 2019 issue

DISCOUNTING AS A VOLUNTARY GESTURE

I have one account (mid-40s in age) that now totals well over $6 million, and is adding close to a million a year. On top of that, they happen to be one of the families I most enjoy working with professionally and personally. I've done great work for them and they truly appreciate it.

In SWIW, you mention fees, and say accounts over $5 million might have a fee under 1%. Specifically, what might you charge accounts in the $5 to $10 million range? These clients haven't barked about the 1% fee at all, even as the account has gone north of $5m in the last 12 months, but I'm considering reducing the fee to 0.75% on every dollar from $5-10m and then 0.50% on everything over $10m. My two questions:

(1) Does this sound like a reasonable fee schedule to you?

(2) How might you approach this conversation about lowering the fee?

 

Let me confirm that I certainly don't have a formula; as you point out, I make only one glancing reference in SWIW to the possibility that an advisor might charge less (and more) than a point.

I like the idea of going to three quarters of a point on balances over $5m. (I think I'd keep another price break at $10m in my pocket; this isn't a decision that needs to be made now, and it certainly needn't be announced.)

Much more important than that, I love your reasoning, and it is that which should form the basis of your informing them of your decision. I suggest something along the lines of:

 

Dear Nigel and Phoebe:

Let me begin by saying what an absolute personal and professional delight it is for me to know you, and to be your financial advisor. You give me the opportunity to render the very best advice of which I'm capable. Even more satisfying to me, you appreciate it.

I don't have any sort of discount formula for my fee. But purely on the basis of the quality (and certainly not the quantity) of the relationship, I would like to reduce my fee from 1% to three quarters of one percent on your account balances in excess of $5 million. Again, I would have you see this as a personal gesture more than a business initiative. It's simply a concrete expression of the joy it is for me to work with you.

Unless you demur, the new formula will go into effect (specify start date). Thank you again for being my clients and my friends.

Sincerely,

 

RESENTING TO NONPROFIT BOARDS

 We have the opportunity to present to the board of a hospital foundation. I can remember your offering somewhat dark thoughts about this type of initiative some time back, but cannot find your comments in the newsletter archive. Can you please point me in the right direction and/or offer your current thoughts?

 Just FYI for future reference, if you'd entered “nonprofit boards” in the newsletter's search function, you'd have gotten two good hits addressing aspects of this question (Ask Nick, July 2002 and June 2014). But maybe it's time to deal with the issue all in one place. The basic principle is: invited to participate in a nonprofit board's swimsuit contest for investment advisors/portfolio managers, go dressed in a tuxedo. In other words, don't accept the premise of the event; don't “compete.”

As I've written before, the main thing you have to realize is that the 10 smartest people in your town, formed into the board of directors of a nonprofit, become the single stupidest person in town. Worse, there are politics, agendas within agendas, favoritism, and a lot of murky stuff you won't even be aware of—nor should you be.

Next, realize that what they're doing in having a swimsuit contest for multiple managers is simply building a file. By stuffing that file with a dozen big, elaborate presentations, they get to say, “We did our due diligence; we went through an elaborate and sophisticated screening process in the selection of our investment advisors/portfolio managers.” This will become the board's defense if it gets sued.

Finally, realize that all the other “candidates” will wear swimsuits. That is, they will all produce reams of performance data, showing that their solution has the “highest risk-adjusted rate of return.” Your tuxedo is: none of this matters. First of all, it's premised on a misapprehension (also referred to in some quarters as a lie), namely that past performance is repeatable. Since it is not—since, in fact, there is no statistical evidence whatever for the persistence of performance—how good the contestants look in their swimsuits is no evidence that they have a brain in their heads. You must say this to the board, in so many words.

The predominant determinant of a nonprofit institution's long-term investment performance will simply be the stocks/bonds/cash mix. And the only rational driver of that allocation is: how much does the institution need to withdraw and disburse in the nearby years, and how much can be left to grow. Say that, too. Base your offer of advice to the board not on selection (which, in addition to being random, is irrelevant) but on a careful analysis of their needs: short to intermediate disbursement demands (to be funded with cash and shorter-term bonds) vs. growth of the endowment itself, obviously to be funded with equities.

You are a financial planner, not a performance handicapper. And your whole appeal to the board must be as an analyst of their real long-term need to allocate their capital rationally, for now and for posterity.

The single stupidest person in town will throw you out, of course, and hire whoever momentarily looks best in a swimsuit. But you'll have done the brave and true thing, so you'll get to deposit however much money is at issue here in The Great Cosmic Bank of Compensation, to be withdrawn by you over time, in accordance with the robustness of your overall client acquisition discipline.

And don't be entirely surprised if one of the board members—remember, a very smart person when not sitting on the board—rings you up one day and says, “I'd like to know more about your approach, for my own personal wealth.”